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Tax-Efficient Charitable Giving with QCDs

July 31, 2020 | By Joe Orff
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Are you concerned about required minimum distributions (RMDs) bumping you into a higher tax bracket? If you’re among the charitably inclined, your donations could offset an RMD’s increase to your taxable income. 

In this insight, we’ll go over what QCDs are and how they can help you lower tax liability and other expenses.

What is a QCD?

A qualified charitable distribution (QCD) is an election to make a direct distribution from your IRA to one or more qualified charities. It’s a strategy that in many cases has become even more impactful since the passage of the Tax Cuts and Jobs Act of 2017. 

Note: “Qualified Charities” do not include private foundations, supporting organizations, and donor-advised funds (please consult with a tax expert to determine if your charity qualifies). 

Who can make a QCD?

If you’re 70 ½ or older and have funds in a traditional IRA, you can instruct the IRA custodian to make a QCD. While the Secure Act increased the age to which you must start taking RMDs from age 70 ½ to 72, QCDs are still allowed starting at age 70 ½.

Benefits of QCDs

QCDs have multiple tax advantages. The primary benefit of making a QCD is that you can reduce or eliminate the RMD which effectively lowers your taxable income and tax liability for the year. In addition, by reducing an RMD, the QCDs also lower your adjusted gross income (AGI) and this provides indirect benefits. AGI is the basis used for various tax calculations. By reducing AGI, the following items are potentially reduced:

  1. Medicare premium costs.
  2. The taxable portion of social security.
  3. Net investment income Medicare surtax.
  4. Roth IRA contribution eligibility.

The Tax Cuts and Jobs Act of 2017 raised the standard deduction and imposed limitations on itemized deductions. For many taxpayers, this led to a shift from itemizing to taking standard deductions, which led to a big issue: charitable contributions were no longer providing a tax benefit if you now take the standard deduction.

QCDs present you with a way around that. When you utilize a QCD, you are using pre-tax dollars in an IRA and preventing these dollars from being included in taxable income. This effectively achieves the same tax benefit as itemizing prior to 2017. For this reason, even if you do not have an RMD to contend with, i.e. those between age 70 ½ to 72, you may still find a QCD to be a smart tax strategy

Rules for QCDs

Those making QCDs must meet the following guidelines:

  1. The transfer must go straight from the Traditional IRA to a qualified public charity 
  2. The QCD max per year is $100,000. 
  3. The taxpayer must be 70 ½ years or older at the time of distribution.
  4. If an RMD has already been taken, one cannot undo this and replace it with a QCD.
  5. The QCD must be completed by December 31, so plan ahead to avoid any complications. 
  6. The taxpayer should inform his or her accountant to ensure the distribution is properly coded.

If you’re required to start taking RMDs, you might be looking for creative ways to lower your tax bill. QCDs provide you with an effective way to reduce your taxable income, which can significantly offset your tax liability.

To decide if a QCD is right for you, please consult with your financial advisor and accountant or schedule a complimentary consultation with a member of our team today.

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